Finance History | POSCO, 31 December 2010 — Berkshire's 4.6% Stake Was Worth US$1.706 Billion

At 31 December 2010, Berkshire Hathaway owned 3,947,555 American depositary shares of POSCO, representing approximately 4.6 percent of the South Korean steelmaker. Berkshire reported an actual purchase cost and tax basis of US$768 million in 2010 dollars and a year-end market value of US$1.706 billion. The position therefore carried about US$938 million of unrealized appreciation on the reporting date. POSCO converted iron ore and coal into steel for industries including automobiles, shipbuilding, construction and appliances, tying demand to investment and manufacturing cycles. Steelmaking rewards scale, process efficiency and product quality, but it also requires costly furnaces, mills, logistics and environmental controls. Those fixed assets can produce powerful earnings when utilization and prices are high, then become a burden when demand weakens or too much capacity enters the market. POSCO's 2010 annual report identified overcapacity as a structural industry issue even as emerging-market demand supported worldwide production growth. Raw materials created another pressure because strong iron-ore and coking-coal prices could raise production cost before steel prices adjusted. The company pursued higher-value automotive steels, lower-cost inputs and operating efficiencies to defend the spread between finished products and raw materials. International sourcing and expansion diversified opportunity while adding currency, political, execution and project-financing risks. Berkshire's reported 4.6 percent interest was a minority investment rather than an acquisition or a role in operating the Pohang works. The year-end gain did not make future returns automatic because the market value still reflected expectations about Asian demand, input prices and global capacity. Berkshire's broader 2010 portfolio discussion emphasized that an owner's economics include both dividends received and the shareholder's portion of earnings retained inside investees. For a capital-intensive steelmaker, the quality of those retained earnings depended on whether new furnaces, technology and raw-material projects earned more than their cost of capital. The photographed POSCO entrance is viewed from the public road approach rather than from inside the industrial complex or the site of Berkshire's purchases. The broad lanes, plant gate and industrial structures make visible both the productive scale and the fixed-cost exposure contained in the quoted shares. Photo: Cho's, CC BY-SA 3.0, via Panoramio and Wikimedia Commons.